Why Europe planned the Great Cyprus Bank Robbery

March 19 2013

Rakesh Krishnan Simha

specially for RIR

Drawing by Dan Pototsky

The unprecedented and steep deposit tax the EU wants to shove down Cyprus’ throat will shave over $3 billion in Russian assets. These are legitimate funds and not a mafia stash as some like to believe.

Yawn!
Cyprus is a tiny country, who cares what happens there? Well if you are a
Russian with tonnes of cash stashed away in the island’s banks, you most
certainly do. In fact, even if you don’t have any deposits parked there,
chances are the chain reaction from the European Union’s planned great bank
robbery could one day hit your finances too.

For years
Russians have treated Cyprus like their private little Switzerland. They have
collectively pumped in over $31 billion in Cypriot banks, boosting the local
economy and turning the idyllic island into an upmarket playground. Here’s how
it could all come unstuck.

The EU’s cash grab

Cyprus is
the latest addition in the long line of insolvent European countries –
Portugal, Ireland, Greece and Spain – needing a bailout from the wealthy
northern Europeans (read Germany). The solution is simple – the EU will provide
nearly $13 billion in bailout money to help the Cypriot government pay its
bills and avert a banking collapse.

But
there’s a hitch – in exchange the EU’s bosses want Cyprus to pick up part of
the tab by levying a one-off tax on bank deposits of up to 9.9 percent.
Basically, if you have a deposit of, say, $100,000, you get a $10,000 haircut.

Now
observe that none of the other nations that came knocking at Brussels’ door
with a begging bowl had such an avaricious levy imposed on them. The reason is
plainly evident: over 40 percent of the depositors are Russians and, therefore,
easy targets. The EU honchos evidently believe most of these Russian account
holders are not legit and relieving them of a tidy amount doesn’t hurt the good
gentry of Europe. Go back a little in history – the same set of people applied
the same logic to sponge off Asia, Africa and the Americas.

Why
are Russia’s leaders worked up?

The
popular belief is that if Russian money travels outside Russia it must be
tainted – by the mafia, graft, uranium smuggling or something like that. But in
reality most of the money belongs to Russian firms. In fact both private and
state-run companies use Cyprus as a tax haven because the country has a
corporate tax rate of 10 percent which is 50 percent lower than Russia’s.

Here is
how it works. Russian investors wire the money to shell companies in Cyprus.
The money is then repatriated through investments in Russian ventures at home
and abroad. According to data provided by the Russian central bank, Cyprus is
the leading source of foreign investments into Russia.

Believe
it or not, this is standard global practice these days. The United States uses
Puerto Rico in a similar role and the role of Mauritius to pump investments in
the Indian stock market and IPL cricket matches is well known.

A US
Senate investigation last year revealed that dozens of American tech companies
move their profits offshore to evade the taxman. Microsoft has saved nearly $7
billion off its US tax bill since 2009 by using such loopholes. Similarly, Hewlett-Packard
avoided paying taxes through a series of loans that shifted billions of dollars
between two offshore subsidiaries.

The $31
billion Russian stash belongs to corporates, banks and individuals. Cyprus
offers them anonymity and ease of banking in their day to day business and
personal lives. A 10 percent levy would amount to a $3 billion loss that could
directly impact the Russian economy. This is why Russian President Vladimir
Putin has slammed the move as “unfair, unprofessional and dangerous”. Indeed,
if the Russians knew the money was tainted – and you can bet the FSB keeps an
eye on the cash pipeline and every rabbit on the way – there’s no way Putin
would have associated with it.

Related:

As for
corrupt Russian individuals and the mafia parking their ill-gotten gains in
Cyprus, there’s no evidence to prove they are not there. But wouldn’t the mafia
find more secretive havens like Switzerland or Britain’s Isle of Man? In fact,
last year over $200 billion was wired out of Russia. Only a fraction of that
reached Cyprus.

A
dangerous precedent

Mikhail
Prokhorov, the metals magnate turned politician, wrote in Kommersant that
Europe “has opened a Pandora’s Box, creating a dangerous precedent in deciding
the problem of the capitalisation of the banking system in problem countries”.

Prokhorov
noted that he held no money in Cypriot banks. Nobody in his right mind would
call him a crook.

Alexander
Lebedev, who owns major newspapers in London, said Cyprus was also a transit
point for criminal money leaving Russia so such a tax doesn’t really affect
transit. But he added, “There are fears for the middle class, who also used
Cyprus.”

A
run on European banks?

The
proposed tax needs to be approved by the Cypriot parliament. But with ordinary
– and hurting – Cypriots hitting the streets in large numbers, a vote in favour
seems unlikely. But if the tax does go ahead, it would be akin to holding a
banner warning YOU ARE NEXT to the PIGS countries. It could lead to an
irresistible run on the banks. Note that banks in Cyprus were closed on Tuesday
and Wednesday to prevent precisely that.

Trouble
in Europe will also impact nations that export to the world’s biggest market.
India’s rupee dropped to 54.2725 per dollar on Monday, the most in two weeks.
This is the kind of news that the global economy, which is limping back from
the recession, can do without.

Victims
of carnivorous capitalism

The
amazing thing about this ‘bailout’ is that ordinary people are being made to
foot the bill for the negligence of bankers and European regulators who were
clearly sleeping on the job. It makes you wonder how long such abuse can go on
before people take matters into their own hands. Clearly, Europe’s leaders are
playing a dangerous game with the people they lord over.

They’re
going to get you

Did I say
Russian depositors are easy targets? Well, not all of them. It is well known
that the Russian mafia doesn’t like to be played with. Mainly, they don’t like
their loot to be taken away from them. If you are a Cypriot lawmaker, here’s a
piece of advice – don’t do anything stupid.